Report: Banks to Tap Local Debt Market to Fight Headwinds

Some Nigerian banks are considering issuing naira-denominated bonds in the short-to-medium term to beef up their capital and strengthen their defence against the impact of the COVID-19 disruptions and oil price shock, analysts at Agusto & Co have stated.

Moody’s Investors Service also yesterday changed its outlook on Nigeria’s banking system to ‘negative’ from ‘stable,’ due to the anticipated impact of the COVID-19 pandemic and oil price drop.
The CBN Governor, Mr. Godwin Emefiele, in his five-year economic blueprint that was unveiled last year, had disclosed plan to direct banks to recapitalise.
According to Olubunmi, Nigerian banks are expected to focus on recapitalisation to be able to withstand the looming headwinds.

He said: “We believe that the banks would focus on recapitalisation. It would be difficult for the banks to issue shares; so you would see that they won’t do rights issue.

“It is from banks’ retained earnings that they pay dividend. So, we expect that banks would pay less dividend this year, so as to retain tier-1 capital.

“Now, talking about tier-II capital, it comprises medium term debt and revaluation reserves. Presently, there are a lot of tier-1, tier-11 and merchant banks that are in the process of issuing medium-term bonds to augment their capital position and prepare them for the impact of the pandemic.”

Olubunmi explained that the banks would be targeting the Pension Fund Administrators (PFAs) in their capital raising plan.

“We believe the PFAs are one of the major investors in bonds. Remember that the PFAs have cash coming in every month, but unfortunately, the Central Bank of Nigeria has since restricted them from its open market operations (OMO) market, which reduced their investment outlets. So, the PFAs would be the primary focus of the banks in raising debts,” he added.

However, Agusto & Co, in the report, noted that in recent times, the capital base of the banking industry has come under pressure owing to the International Financial Reporting Standard 9 adoption and other asset quality issues that have resulted in major write-offs.

Thus, tier II capital-raising activities heightened in the 2019 financial year up until the first quarter of 2020.
It stated that based on the asset quality challenges and the naira devaluation, there would be some strain on the industry’s capitalisation ratios in the near term. “However, this will be moderated by slower risk asset growth owing to the static business environment, increased profit retention, revaluation gains and the use of excess qualifying tier II capital to uphold capital adequacy ratios.

“We also believe that CBN’s forbearances will cushion the impact of the COVID-19 pandemic on the industry’s capital base. The banking industry will need to recapitalise in the short to medium term.

“However, this will be challenging considering the current environment and weak investor sentiments. For banks that may be seeking to raise tier-1 capital, the weak valuations at this time – which has led to all the quoted banks trading at a discount to book values – may be a deterrent.

“Tier-II capital will be raised to support capital adequacy ratio up to the extent that it is permissible by the CBN and that market conditions are favourable. We believe that regulatory support will be required to implement rules aimed at protecting the banking industry’s profitability,” it stated.

Moody’s Changes Nigerian Banks’ Rating

Moody’s has changed its outlook on Nigeria’s banking system to ‘negative’ from ‘stable,’ due to the anticipated impact of the COVID-19 pandemic and oil price drop.

The rating agency explained in a report that in Nigeria, banks would face weakening loan quality and foreign-currency liquidity as low oil prices and the pandemic weigh on the economy.

These new challenges, it stated, would add to existing headwinds from slow economic growth and rising regulatory costs.

It noted that banks’ exposure to the oil and gas industry was substantial, at around 27 per cent of total loans at the end of 2019, making the system susceptible to the oil price slump.

“The banking system is also highly dollarised, putting pressure on both assets and liabilities in the event of a naira devaluation.

“Nigeria’s largest banks, however, will continue to benefit from high government support.
“We expect low oil prices and fallout from the coronavirus pandemic to place further pressure on the Nigerian economy, which was already falling short of growth rates required to increase per capita income,” it stated.

The ratings agency predicted that the country’s real Gross Domestic Product (GDP) would contract by 0.8 per cent in 2020 before expanding by 0.9 per cent in 2021, still below the rate of population growth.

The economy would remain sensitive to oil price movements because a large part of the country’s foreign-currency earnings are derived from oil exports, it added.

Moody’s also expect that credit growth in the country would slow down, mainly as a result of reduced corporate lending, adding that facility drawdowns by companies, whose cash flows have tightened would likely support short-term loan growth.

“In addition, the CBN as part of its response to the coronavirus pandemic, is making funds available via banks, helping to ease the slowdown in loan growth.

“Loan quality will deteriorate due to the challenging economic conditions. Weaker economic growth and the collapse of the oil price will lead to a deterioration in banks’ loan performance.

“We expect problem loans to rise to between eight per cent and 10 per cent of total loans from six per cent in December 2019, with risk tilted to the downside should the depressed oil price persist for more than a year. Loan restructuring and forbearance will lessen the impact of loan quality deterioration,” it added.

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